Financial Rations


In 2005 IBM had a return on equity of 26.7 percent, whereas Hewlett-Packard’s return was only 6.4 percent. Use the decomposed ROI framework to provide possible reasons for this difference based on the data below:







Sales/Net Assets



Effective After-Tax Interest Rate



Net Financial Leverage




IBM Analysis

Return on Operation Asset = NOPAT/sales * Sales/net assets

= 9.00%* 2.16



Borrowing multiplier = ROA- EATR



Return on Leverage = Borrowing multiplier * Net Financial leverage


= 7.15%

ROE = ROA* Net Financial Leverage

26.7% = X*0.42


ROA = 63.57%

Decompose the return on assets:

ROA = Net income/Sales * Sales/Assets

63.57 = X * 2.16

Net income/Sales=29.43%

Hewlett Packard Analysis

Return on Operation Asset = NOPAT/sales * Sales/net assets

=2.70%* 2.70


Borrowing multiplier = ROA- EATR



Return on Leverage = Borrowing multiplier * Net Financial leverage

=6.2 %*( 0.16)

= -1. %

ROE = ROA* Net Financial Leverage

6.40% = X*(0.16)


ROA = -40%

Decompose the return on assets:

ROA = Net income/Sales * Sales/Assets

-.40 = X * 2.73

Net income/Sales=-14.65%

It shows up IBM’s 26.7% profit for value demonstrate that its administrators are producing more return for its investors than HP that have 6.4 percent return on value.

  1. 2. In a period of rising prices, how would the following ratios be affected by the accounting decision to select LIFO, rather than FIFO, for inventory valuation?


* Gross Margin

* Current Ratio

* Asset Turnover

* Debt-to-equity ratio

* Average tax rate


*Gross margin = LIFO has the more significant expense of products sold which makes it lower than FIFO strategy.

*Current ratio – As the present resource is diminished, along these lines current proportion is lower under LIFO technique.

*Asset turnover rises since resources are lower under LIFO.

* Under LIFO, greater expense of products sold outcomes in low total gain which results to diminish in the value. Hence, debt-to-equity escalates.

*There is no effect in Average tax, therefore, it remains unaffected hence the same


What are the potential benchmarks that you could use to compare a company’s financial ratios? What are the pros and cons of these alternatives?

To think about money related proportions for an organization, the benchmark utilized is that of the business/Sector in which the organization works. Most importantly is that same budgetary proportions are determined for the business by taking the normal of the considerable number of organizations operating under the division. At that point, the qualities would be utilized as the benchmark for examining the organization.

The essential and foremost advantage of this benchmark is that it makes it so easy to understand the organization and the business environment where the organization works.

The inconvenience for this investigation is that there will be anomalies in the business. There will be organizations with extraordinary budgetary proportions and afterward can mutilate the company average.







Discussion Question 6: What are the reasons for a firm having lower cash from operations than working capital from operations? What are the possible interpretations of these reasons?


Money from tasks is lower than working capital from activities when current resources (e.g., records of sales, stock, and other non-money resources) increment and when current liabilities (e.g., creditor liabilities and other current liabilities, barring notes payable and obligation) decrease.

 Records receivable and the stock could be expanding because the firm is developing to fulfill an extra market need.

¢Conversely, records of sales and capital could be advancing if the association’s clients are experiencing issues paying for merchandise or benefits, or if deals have eased back making inventories climb.

 Records payable could be diminishing because the association’s money related position has improved and the firm pays its providers sooner than previously.


Key factors to be considered while applying ratios

  • Managing integration:projects have a wide range of exercises going on, and there is a need to keep the “entire” thing moving altogether – coordinating the majority of the elements that occur. Taking care of integration is tied in with building up the project sanction, scope explanation, and plan to organize, to monitor, and to control venture change.
  • Managing scope Projects need a characterized parameter or degree, and this must be separated and managed through a work breakdown structure or WBS development. To achieve a scope is to tie in with some proper planning, definition, undertaking some verification as well as taking control  measures about  the project
  • Managing time/schedule:projects have a definite start and an unmistakable consummation date. Along these lines, there is a need to deal with the planned time as indicated by a task plan. Managing time/plan is about the definition, sequencing, asset, and term assessing plan advancement, and timetable control.
  • Managing costs:the project utilizes assets, and however, there is a need to deal with the venture with the acknowledgment of making esteem (i.e., the advantages determined surpass the sum spent). Managing costs are considered as asset planning, cost assessing, budgeting, and control.
  • Managing quality: projects include clear expectations or work items. However, these expectations need to meet performance goals and scientific aims. Hence, maintaining quality is about quality planning, quality confirmation, and quality control.

Question b)

 Clarity of project requirements, project scope

Much of the time, blurry project necessity indeed results in project dissatisfaction. Directly toward the start, the manager has to ensure that all the partners or stakeholders comprehend to project management necessities plainly and the significance of having unambiguous project scope. It is genuinely normal sometimes to see that business group, project directors working with customers to help manager’s articulate customer’s prerequisites. Therefore this will solemnly make sure that the project is  in a position to deliver the expected value returns for both question 6 and 9,